Saturday, March 31, 2007

Crossposted from Inexpensive Home BuildingThe mainstream media are finally doing many stories on risky mortgages. Ameriquest was one of the first bubble lenders to admit financial trouble.

From Wikipedia:

Ameriquest is one of the United States's leading wholesale sub-prime lenders. It is a private company, owned by Roland Arnall, founded in 1979, in Orange County, California, as a bank, Long Beach Savings & Loan. The bank moved to Orange County in 1991 and was converted to a pure mortgage lender in 1994, renamed Long Beach Mortgage Co. In 1997, the wholesale part of the business (funding loans made by independent brokers) was spun off as a publicly traded company, called Long Beach Mortgage; the retail part of the business was renamed Ameriquest Capital and remained private. (In 1999, Washington Mutual purchased Long Beach Mortgage.)

Ameriquest is best known for its subsidiary, Ameriquest Mortgage Company, which makes direct loans to customers. Its Argent Mortgage Company affiliate works with independent brokers. It has offices nationwide, and more than 12,000 employees. Other subsidiaries are Ameriquest Mortgage Securities, Long Beach Acceptance Corp., and Town & Country Credit.

Ameriquest was among the first mortgage companies to use computers to search for prospective borrowers, and to speed up the loan process.

...

Sub-prime lenders made $587 billion in new mortgages in 2004, up from $390 billion in 2003, according to National Mortgage News. Ameriquest's share of that is estimated at over $50 billion.

In 1996, , the company paid $3 million to settle a Justice Department lawsuit accusing it of gouging older, female and minority borrowers. Prosecutors accused it of allowing mortgage brokers and its employees to add a fee to these customers of as much as 12% of the loan amount.

In 2001, after being investigated by the Federal Trade Commission, the company settled a dispute with ACORN, a national organization of community groups, promising to offer $360 million in low-cost loans.

On 1 August 2005, Ameriquest announced that it would set aside $325 million to settle attorney general investigations in 30 states. In at least five of those states — California, Connecticut, Georgia, Massachusetts, and Florida — Ameriquest has already settled multimillion-dollar suits.

In May, 2006, Ameriquest Mortgage announced it was closing all of its retail offices, and will emphasize in the future its loans through brokers, a channel that is not covered by the predatory lending settlement with the Attorneys General.

The issues confronted by companies like Ameriquest are considered by many industry experts to be the major contributing factor to the rapid rise of Certified Mortgage Planners, certified industry experts that work in concert with Certified Financial Planners in harmonizing the home finance products utilized by consumers with their larger financial portfolios.

Today's Car Talk radio show caller bought a $14,000 used luxury sports car with home equity. The car had a bad transmission, but he was more interested in the Candy Apple Red color.

The big problem with the housing bubble is that not only did new buyers overpay for homes but also that existing home dwellers who had manageable mortgages embarked on spending sprees based on the imagined paper "wealth effect" of higher appreciation. They treated their houses as ATMs by taking out home equity loansor the similar Home Equity Line of Credit called HELOC. So, even people who had bought before the bubble and had good finances have endangered themselves by bubble behavior.

Appreciation can be temporary. Debt is certain.

The big mistake people make with debt is that they assume that present conditions or trends will remain the same ("I make enough for that payment."). Every scientist should know the danger of extrapolating current trends into the future and the uncertainty is why stock disclosures warn that past performance does not guarantee similar performance tomorrow.

Make your life easy by not volunteering to lock yourself into future burdens, especially unnecessary ones.

Friday, March 30, 2007

“Time was when that embarrassing chunk on your credit card carried a teeny bit of cachet.”

I remember no such time.

The misleading “Don’t charge groceries” badvice (I just made a new portmanteau) gets basic budget and financial principles completely backward:

Charge everything as long as you pay before you incur interest. The rule is “Don’t pay interest/fees,” not “Don’t charge.” Charging can save you money if you have a pragmatic rewards program (cash or food, usually not airline miles that make you spend far more on an unnecessary trip than you save).

The few things that can justify interest charges are necessities and groceries are a necessity; so groceries are one of the few things that would be on your credit card bill in a true emergency.What on Earth does “Don’t charge groceries” mean except imply that you can charge new televisions and i-Pods?

Money is fungible so what matters is your bottom line, not a shell game to artfully keep one type of item off one type of bill.Don’t waste energy and fool yourself with cooked books.

The main problem is that “charging the necessities” usually includes hundreds or thousands of dollars of unnecessary spending:

Being on a grocery-store receipt does not make it necessary:Many people continue to buy overpriced, non-nutritious products even when the financial wolf is at the door.

Eating out is not necessary:One misleading example for charging “survival debt” was that fast-food restaurants accepted credit cards.The person who wrote that has no credibility in giving budget advice.Eliminating prepared foods is one of the first basic rules for saving money.

Your current home is probably unnecessary even though a home is necessary:Using a credit card to pay rent is another misleading example for “survival debt.”Almost no one lives in minimum housing even though doing so is a great way to get ahead.Overcome laziness or embarrassment and downsize the home. You might find that using a credit card for a moving van can save 5% or more of your total income in lower housing costs.

We have only scratched the surface but the lesson for now is to learn to spot bad advice before it ruins you.

Monday, March 19, 2007

In most budget discussions, you are not talking about working for free or donating all income to charity; you are deciding whether it is better for you to spend on you now or spend on you later (“you” can include your loved ones because it is not self-denial if you want to spend on loved ones—it is self-fulfillment).In other words, budgets and savings increase what you can lavish on yourself—so skip the whole “woe is me” martyr complex and start planning.

Every time you start to think that a smart action is “too hard,” remind yourself of what you are enabling yourself to do better by the action.Smart spending not only affords more toys in the long run, it improves your health and well-being by avoiding stress—and avoiding health costs gives you a double pay-off.

If you think that not buying that new electronic gadget is hard, remember that bad spending makes your life hard, not being able to leave a bad job because you're barely treading water makes your life miserable, and not being able to make tomorrow’s bill payment drives you to nervous breakdown.In contrast, building financial security makes your life easy and lets you sleep like a baby.